Which types of risks should be considered in investment planning?

Investment planning involves a comprehensive evaluation of various risks that can impact the performance and value of investments. The correct choice highlights several crucial risks—market risk, credit risk, interest rate risk, inflation risk, and liquidity risk—that investors should be aware of.

Market risk pertains to the risk of losses due to fluctuations in market prices and is an overarching concern for all types of investments, be they stocks, bonds, or real estate. Credit risk involves the risk that a borrower may default on their financial obligations, impacting the investments tied to that borrower. Interest rate risk is particularly relevant for bonds, as changes in interest rates can significantly affect their value; rising rates typically lead to falling bond prices. Inflation risk represents the potential decrease in purchasing power due to rising prices, which can erode the real returns on investments. Lastly, liquidity risk pertains to the ability to quickly buy or sell investments without causing a notable impact on their price, which can be particularly important during periods of market volatility.

Recognizing and assessing these risks is fundamental to effective investment planning, allowing an individual to construct a portfolio that aligns with their financial goals and risk tolerance. This comprehensive understanding leads to more informed decisions and better risk management strategies in the investment process.

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